Summary of Mendes Hershman Student Writing Contest Prize Essay: America’s Oldest Drug Cartel

By some measures, the pharmaceutical market in the United States has been enormously successful. Almost two thirds of Americans use prescription drugs, and we pay more for them than any other country. For an industry that is so large and affects virtually every American in some way, it seems strange that almost no one understands how its pricing structure works. Rest assured, this is by design. Everything about the prices negotiated between various entities in the prescription drug market is kept confidential by contract; even the entities involved cannot see the entire picture, because they only have access to part of the information.

My Note focuses on two of these entities: drug manufacturers and Pharmacy Benefits Managers (PBMs), who negotiate drug prices on behalf of insurers. In essence, the pharmaceutical market operates to increase prices by creating perverse incentives. Instead of competing for business by decreasing prices, drug manufacturers are motived to increase prices to give PBMs the biggest payouts based on a percentage of the sale price. This leads to unsustainable price increases for consumers, the only party in the supply chain that cannot truly negotiate.

Take insulin, a life-saving drug that has existed for almost a century. In that time, only three companies have ever made it, and no generic insulin ever has entered the market. Insulin products have become more effective over the last hundred years, but they have not changed at all in the last ten years. Even so, the list price of insulin has nearly tripled in the last decade, and out-of-pocket insulin costs have doubled. These extreme price increases have caused patients to skip doses or ration their insulin, which harms their health and places their lives at risk. This practice is quite common: about one in four patients ration their insulin.

Patients who need insulin to survive have a few options. They could wait around for regulators to step in—an outcome unlikely to happen anytime soon—or they could take matters into their own hands. In 2017, consumers affected by insulin price inflation brought a class action lawsuit against the three manufacturers of insulin in the United States: Eli Lilly, Novo Nordisk, and Sanofi. These companies set the list prices for insulin, which ultimately affect the amount consumers pay. In February 2019, the case passed a major hurdle when the court partially denied the insulin companies’ motion to dismiss, allowing the case to move forward on its state fraud and consumer protection claims, but dismissing the federal claims under the Racketeer Influenced and Corrupt Organizations Act (RICO).

The court dismissed the RICO claims based on the indirect purchaser rule, a concept borrowed from antitrust law. In essence, the court ruled that patients who need insulin cannot seek damages from the insulin manufacturers for price inflation because patients are not the original purchasers of the drug. This case presents a striking example of how the indirect purchaser rule has systematically insulated antitrust and RICO violators from liability, while leaving injured consumers without a remedy.

Since my Note was published, the lawsuit has been progressing slowly, with many plaintiffs coming to settlement agreements with the manufacturers. However, the court’s decision to dismiss the RICO claims marked the end of the case for many plaintiffs, because their state laws left them without viable causes of action against the drug makers. Outside the ongoing litigation, many people who need insulin to survive still have no choice but to keep paying extortionate prices or put their lives at risk; the indirect purchaser rule will continue to prevent them from bringing otherwise viable antitrust and RICO cases into court. While a great deal of reform is needed to address the slew of problems pervading the insulin and pharmaceutical industries, overruling the indirect purchaser rule would be a considerable step in realigning RICO and antitrust laws with their original goals.

Julia Thibault, Note, America’s Oldest Drug Cartel: Civil RICO Action In re Insulin Pricing Litigation and the Case for Overruling the Indirect Purchaser Rule, 46 Am. J. L. & Med. 470 (2020).